ESG: keeping up with the finance sector’s ‘hottest topic’

Sustainable finance is now at the heart of business strategy for Intertrust Group – now a member of non-profit organisation LuxFLAG – and for our clients

Awareness of environmental, social and governance (ESG) issues and sustainable finance has increased hugely over the past 10 years, at both public and political level. Climate change is high on the agenda; equality and diversity are discussed regularly; while investors, employees and individuals continue to ask how businesses can work for environmental and social good.

Meanwhile, policymakers and regulators are becoming ever more demanding when setting ESG standards for companies – and it’s become a top priority for them.

Yet sticking to ESG criteria when investing in or running a business should not be seen merely as a regulatory burden. It is also an opportunity. Businesses can operate sustainably while also meeting investor demand and achieving growth. There is huge potential in terms of possible new products, investment returns and job creation.

ESG regulation is becoming mandatory

Regulatory changes have put ESG at the heart of policymaking, so it cannot be ignored. Staying relevant to all stakeholders in the value chain is critical, which means ESG should be at the top of the product and regulatory change roadmap. Before 2021 voluntary standards were in place, but non-optional disclosure standards are now being implemented.

The EU Sustainable Finance Disclosure Regulation (SFDR) is currently being introduced, bringing mandatory ESG disclosure obligations for asset managers and other financial companies. It will be in force by January 2022. In addition, the United Nations Global Compact encourages businesses and firms to adopt sustainable and socially responsible policies.

Intertrust Group has also signed up to SFDR, creating a five-point commitment to ESG principles in every aspect of our business. This embeds ESG into our core values and interests.

While regulatory obligations mean businesses will need to attend to ESG policies and standards, they also present a huge opportunity to refocus strategy and company vision – for the long term, for investors, for clients and for employees.

The past 12 months have accelerated awareness of the importance of sustainable business, and given a boost to a movement which was already growing. That movement is both from the grassroots – consumers and activists questioning the role of companies and their environmental impact – and from politicians.

Governments are now aware that political pressure is growing and that consumers, investors and voters, as well as employees, all want to see policies that encourage ESG criteria. Those businesses that are slow to change, that fail to embrace ESG principles, or that attempt to pass themselves off as “greener” than they really are (known as “greenwashing”), will find their brands and business potentially damaged.

ESG and sustainable finance need robust measurement criteria

What is currently lacking, however, is data that measures just how green a company or product really is. One of the issues around the expansion of ESG products is the difficulty in comparing them. Investors want to be able to compare sustainable criteria, but there is no single global standard or benchmark by which ESG is currently judged.

A solution might be to adopt standards which can help investors make comparisons and investment decisions.

A long-term advocate of ESG and sustainable finance is Sachin Vankalas, general manager of LuxFLAG. This not-for-profit organisation was set up in Luxembourg in 2006 by public and private partners to bring transparency and measurable standards for ESG within the financial sector. Intertrust Group became a member of LuxFLAG in June 2021.

“Sustainable finance means many different things to many different people,” says Vankalas. “When I first started out, the concept of ESG was alien to many investors. Even in 2013 I recall visiting an asset manager and explaining that this movement was coming and having to explain that they needed to incorporate and demonstrate sustainability both internally and to clients. Employees, investors and the wider community would ask what they were doing to support sustainable finance. Now ESG is the main topic and it’s here to stay.”

LuxFLAG, which has 94 members, provides an independent labelling process for funds investing in sustainable finance – which, Vankalas explains, can be beneficial for companies, clients and customers: “Financial organisations, NGOs and other interested parties can also join it to become active in sustainable finance, sharing knowledge and resources.”

Luxembourg sets an ESG example

As home to one third of ESG funds globally, Luxembourg is an excellent jurisdiction in which to implement such labelling. The country’s ESG funds collectively represent 15% of assets under management (AUM) in Europe, with €2tn invested. LuxFLAG labels funds that meet its criteria, dividing them into two main categories:

• Impact investing or impact finance. This is where financial instruments are invested in activities that have a positive social or environmental impact, such as hospitals, vaccines or real estate that provides sustainable affordable social housing.
• Sustainable transition investing. Here funds, through the process of ESG integration, invest in companies that have started building systems to improve their ESG criteria, such as looking at the logistics of supply and delivery chains.

Vankalas says that systems such as this can bring clarity, helping to provide an independent assessment of the green criteria of funds and setting out standards.

And ultimately, these systems will become more standard. “As recently as 10 years ago, businesses and asset managers saw it as a niche concern,” says Vankalas. “But ESG is now the hottest topic in political and financial circles, and is very important, particularly to younger generations.”

Intertrust Group: our commitment to the ESG vision

Our five sustainable goals are:

• Education: the education of employees and future employees is essential to our future
• Gender equality: we are committed to achieving gender equality in our workforce
• Economic growth: making sure our work is tied to economic growth
• Reducing inequality: we have introduced a new framework to ensure consistency in how we pay and recognise our people across different demographic groups
• Climate action: we are looking at more flexible working practices and digital transformation

Belonging to LuxFLAG will help us share knowledge and best practice with the industry, our clients and our staff. How we meet the challenge of sustainable finance will define us – not just now but for generations to come.

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